The economics of political instability in Nepal--Dunham's Interview with Himalaya SJB Rana

October 16, 2007

Peace and rule of law are the prerequisites for economic development—basic ingredients currently absent in Nepal. The cancellation of the November elections was the latest bad political news. A meeting between the Maoists and Seven-Party Alliance was convened in an effort to break the deadlock; the talks broke down two days ago.

According to the leading party in Nepal, the Nepali Congress (NP), the Maoists’ demands for electoral reform and the immediate abolition of the monarchy are in direct contradiction of the original peace terms agreed to one year ago.

Exasperation from the people, even with the Dashain holidays in full bloom, is pronounced. The Nepal Federation of Indigenous Nationalities (NFIN) now threatens agitation if further delays for the Constituent Assembly elections continue. “Our past agreement with the government was made only with the hope that the election would be conducted on time,” said a spokesman for the NFIN.

Meanwhile, according to some reports, New Delhi is looking into the possibility of restructuring its foreign policy with Nepal. Indian experts have been assigned the task of coming up with new strategic options, given the changing political context in Nepal. No doubt other countries are toying with fresh approaches as well.

And, with the exception of tourism, the business community is paralyzed. Interestingly-- since the 19-Day uprising of April 2006-- tourists have poured into the country. The much-publicized end of the decade-old insurgency obviously encouraged the inflow. Casinos and hotels, the major sources of foreign exchange for the country, announced a remarkable 43% increase in the first five months of 2007 alone. As seen in the past, however, foreign visitors are fickle and easily frightened away if Nepal returns to a more demonstrable level of violence.

In any case, Nepal will never achieve economic health through tourism alone. An agrarian society in which a third of the people live below the poverty line, Nepal has been unable or unwilling to exploit its considerable potential in hydropower—second only to Brazil’s. And prospects for foreign trade or investment in other sectors remains poor because of corruption, abysmal infrastructure, remoteness, landlocked geographic location, security concerns and civil strife.

However one attempts to boost Nepal’s economy, the solution always returns to rule of law, or lack of. During this last month, Nepal’s business community has expressed grave concern over the worsening security situation: Industries and factories are closing down due to incessant protests, strikes, threats and extortion by former Maoist rebels and pro-Madeshi groups in the Terai. Entrepreneurs say the environment of fear and violence is weakening the foundations of their businesses and this, in turn, has affected the security of workers’ jobs. According to the Nepal Chamber of Commerce, the impact has never been so bad or demoralizing. Said one businessman, “The situation is much worse today than during the armed conflict because then we had to deal with only one group of rebels [the Maoists], but now there are many.”

The “many” refers to the various insurgent groups cropping up in the Terai, (southern Nepal), which is the agricultural and industrial heartland of Nepal. Fear and resentment and distrust have spread between the traditional ethnic rivals and the groups who have moved down to the Terai from the hilly regions to set up businesses and work the land. For many Madeshis, the Pahadis (the hill people) are viewed as oppressors.

“It’s a traumatic situation for us as there seems to be no solution for dealing with the worsening anarchy and fear,” said businessman Damodar Acharya, a senior member of the Nepal Chamber of Industry and Commerce.

One of the main problems is moving goods from the Indian border north to the Kathmandu Valley. The crucial highways are often shut down. “We can’t sustain our livelihood any more in Nepal and so many of us are migrating to India where there is peace,” said an exasperated truck driver. But is not just implacable insurgents-- nor is it simply a matter of marginalized groups with legitimate grievances who monkey wrench the safe flow of goods. Thugs and gangs, many originating from India and many who pose as insurgents, extort and terrorize Nepal’s workforce on a regular basis.

There is also the largely overlooked problem of youth. 60% of the population is under the age of thirty; labor surplus within this age group is simply not adequately addressed—to the detriment of the entire country. Unemployment lavishes would-be insurgents with readymade followers, which, in turn, heightens political instability, which, in turn, ratchets up corruption and economic chaos. Nepal seems to be plagued by this never-ending downward spiral.

Recently, I had a chance to sit down with Mr. Himalaya SJB Rana, one of the leading members of the Nepal business community, and discuss the current economic crisis. Born in 1928 in the privileged Rana family, he nevertheless supported the demise of the century-old Rana clan’s dynastic rule over the monarchy in the early 1950s. He was selected to serve as the founding governor of Nepal Rastra Bank. He initiated the introduction of Nepali currency throughout the nation and successfully implemented free convertibility of Nepali currency into Indian currency at a stabilized rate of exchange. He was Resident Representative of UNDP three times in as many countries. After his retirement from the UN in 1986, he became Chairman of one of the first private banks in Nepal, Himalayan Bank Limited. He also founded Gorkha Brewery, Gorkha Bricks Factory and Lumbini General Insurance Company.

DUNHAM: It’s been said that you are the most liberal of all the Ranas. How did you acquire that reputation?

RANA: Well, genealogically, I am the great-grandson of the Prime Minister Maharaja Dev Shamshere, who was the most liberal Prime Minister during the hundred-year Rana rule.

[Maharaja Dev Shamshere also had the briefest rule of all Rana Prime Ministers—114 days in 1901—before being replaced by his less progressive (but far more ambitious) brother Chandra Shamshere. Nevertheless, Maharaja Dev Shamshere achieved a great deal during his brief rule. He started the first Nepali language newspaper, Gorkha Patra, which is still published as an official daily. He manumitted female slaves in Kashi, Lamjung and the Kathmandu Valley. He is credited with devising a scheme for the abolition of all slavery, which his successor put into effect in 1924. He also proclaimed a scheme for universal primary education. A network of Nepali language primary schools, called Bhasa Pathshalas, was started during his rule.]

RANA (continued): Also, in the mid-1940’s, I studied in Bombay when the movement for independence in India was at its height. As you know, India became independent in 1947. So during those student days, every week on the street, there would be slogans shouted like, “Long live the revolution!” That made a big impression on me. Then, when I finished my masters, I met Major-General Subarna Shamshere, who was one of the founding Nepali Congress leaders.

[Major-General Subarna Shamshere was disenchanted with the Rana establishment after his father was removed (by Judha Shamshere) from the PM's Roll of Succession. Going into self-imposed exile in Calcutta, he joined forces with other founders of the Nepali Congress Party, which, from the Rana point of view, was tantamount to treason. Initially, Nepali Congress had no president and looked to Somendra Nath Tagore, the leader of the Revolutionary Communist Party of India, for inspiration and guidance. Basically, the party aimed at the establishment of a responsible democratic government in Nepal, with the King as a constitutional monarch, through a popular legislature elected on adult suffrage. In 1950, King Tribhuvan fled his “palace prison” in Kathmandu to newly independent India, touching off an armed revolt against the Rana administration. India’s firm political and diplomatic pressure combined with the insurrectionary tactics of Nepali Congress resulted in King Tribhuvan’ being restored to the throne in 1951, the ending Rana oligarchy forever. In the king’s first cabinet, Major-General Subarna Shamshere was rewarded for his part in the overthrow of Rana rule by being named Minister of Finance.]

RANA (continued): I met Subarna Shamshere in Calcutta. In the late 1940s, what I was doing was very dangerous. I signed a document pledging my sympathy to ending the Rana rule, and also setting up democracy in Nepal.

DUNHAM: Did your family know what you were doing?

RANA: It all had to be done very clandestinely. But my mother and I—my stepmother, actually—she knew and we worked very hard after I returned to Nepal. We had some secret contacts with the Nepali Congress leaders outside the country. We used to contact them through several means. Our goal was to inform them about the latest situations with the Rana government. We were also busy recruiting people interested in our cause. It was about that time His Majesty King Tribhuvan took asylum in the Indian Embassy. [Nov. 6, 1950] And that brought about the change in the political scenario.

DUNHAM: So you were determined to end the family rule?

RANA: You see, for 104 years, the Rana family ruled the country, but even among the Rana family, a smaller and smaller group was in power. So what happened was that, when there was this political settlement brokered by India, in which the Rana-Nepali Congress coalition government was to run the country, our group said, “Let the Rana be the Prime Minister, but of the four who are appointed as ministers in his cabinet, half should be elected. We brought about that change, which later led to the end of Rana rule.

DUNHAM: If we could jump ahead, I would like you to describe the economic changes that have transpired since the 2001 palace massacre.

RANA: The economic situation in Nepal has deteriorated since 2001 because of the very deplorable law-and-order situation in the country. The insurgents blocked highways, the arteries of the economy, so that industries could not get their raw material supply in time, and even when they manufactured goods, they could not transport them to the markets. So the economy activity—the level went down, down. And then again, very frequently, the insurgents and sister organizations organized bandhs [strikes], something new in Nepal—at least two or three times every month. So the shops would be closed, so there would be no sales, so the economic growth rate went down from 5 to 6%, to 2%. This is the main thing.

DUNHAM: What about your business associations with international companies? Did that alter?

RANA: A couple of them have closed down. Some way, some how, they are carrying on. But now it is more serious because now the Maoists have joined the political mainstream, but their threatening continues to be very aggressive. They are opposing and contacting the industries and some workers and saying, “If you join our trade union, we will negotiate with your employers and get you better terms and conditions of service.” And so now, I think, most industries are wondering what to do because it has become very difficult to deal with the Maoist trade unions.

DUNHAM: You are against trade unions?

RANA:All right, the trade unions naturally press for better terms of conditions of service—that’s fine. But they do it in a very intimidating manner: hitting the supervisors, locking up the managers. Recently, one proprietor was supposedly taken away, beaten black and blue. Another one from the press met with the same fate. And that’s what triggered this mammoth spontaneous procession of all the businessmen—not only the big businessmen but also retailers, small shop-owners—all came out in the streets of Kathmandu—two lakh [200,000] people insisted this must stop.

DUNHAM: Was this the first time that the business community had engendered this kind of demonstration?

RANA: They had earlier also done it, but it was not so successful. The last one was very successful. Spontaneous. Everybody felt enough was enough.

DUNHAM: And what was the result of that?

RANA: The result of that is that the Maoists, I think, have taken note that their popularity is waning. And the other thing that happened was that the Speaker of the Parliament organized a meeting for the business community, with representatives of all political parties including the Maoists. And there, the businessmen were able to put up their case: how difficult for them it has become to continue their business. I think that has made some impact.

DUNHAM: What are the business community’s demands to the Maoists?

RANA: Don’t lock up. Don’t intimidate. Negotiate with us. What we can do, we will do. What we cannot do, we cannot do.

DUNHAM: And what about claims of extortion?

RANA: Extortion, I think, has another dimension. The Maoist unions are going directly into the industries and knocking up the management sometimes. I don’t think that’s extortion. But extortion has been rooted to criminal gangs now. Many people tend to believe that it is the Maoists. I don’t think so. Criminal gangs have come up because of instability and lack of law-and-order.

DUNHAM: Are these organized gangs? Or just thugs?

RANA: Organized. Some are organized.

DUNHAM: Well organized?

RANA: Well organized.

DUNHAM: Does this go on mostly in the Kathmandu Valley, or throughout Nepal?

RANA: It has happened in the Kathmandu Valley quite a lot. One group calling themselves “The Spiders”—three or four members were arrested and their leader is somewhere in India. In Terai, you see how it borders India—Bihar, UP-- both states are well known for criminal gang activity. In Terai, the criminal gangs from India are also taking advantage of the situation. They are abducting people, demanding ransom, beating, then getting the ransom and setting them free.

DUNHAM: In the last several months there have been some serious mass demonstrations turned violent in Terai.

RANA: Yes.

DUNHAM: Which brings me to a question about the Madeshi. What impact has the Madeshi agitation had on the rest of Nepal? And how important is it to listen to their grievances?

RANA: It is very important because if the districts are closed down, there will be more unemployed people on the streets. What will they do? They have been going to India, earning half the wages; they are trying to go the Middle East, to Korea, to everywhere. It’s sort of like the exportation of the youth of Nepal. In the hills, people say, there are no young men left.

DUNHAM: So the Madeshi grievances are well founded?

RANA: Yes.

DUNHAM: In the past, how have the people from Kathmandu and the hills regarded the Madeshi?

RANA: Very frankly speaking, the Madeshis were regarded as—I mean-- there was sort of a colonial attitude toward the Madeshi on the part of the hill people. The hill people were in the government; the police officers, the bureaucrats, mostly were from Kathmandu or the hills. And when they [the hill people] held offices in the Terai, the Madeshi were treated like second-class citizens. It’s true. Now, you see, because of the Maoist insurgency—one of the good things is that all the pent-up feelings—feeling of being dominated by the hill people or by the Brahmans and Chhetris and Newars—the Madeshi have all come forward now. And now the Dalits [untouchables] have their own grievances. Madeshis have their own grievances. Now is the time to meet this challenge and to address their aspirations and reach a political settlement.

DUNHAM: Let’s talk about youth. This is a country in which the majority of the people are under the age of thirty. According the youth leaders I have talked to, they feel marginalized; they feel like they don’t have a voice in the government, that the majority of the men in power are really quite old.

RANA: True.

DUNHAM: What needs to be done to bring the youth into the fold of the political system so that they feel like they are part of the system as apposed to being sidelined and looked down upon?

RANA: It’s not an easy question to answer. It’s true that very old people hold political leadership. And it seems like the leaders don’t like to give up their leadership. They like to hang on and on—it’s like an addiction. That’s true, everywhere, perhaps. Young people: My personal view is that during their youth they must work hard to acquire skill and get ahead in their profession, rather than dabbling in politics. They join politics because the political parties have been using them as –in Nepali, we have a term—“monkey troops.” [In Hindu mythology] Ram used the monkeys, you know, to fight the demons. So Nepali Congress, the UML, and now, more, the Maoists, you see? --all are using students, encouraging them to come up with all sorts of demands. The question is: To run a country, to run a district, or to run a county you need experience—you need maturity. Yes, the voice of the youth should be heard--maybe in the education institutions. There should be adjustments. There are many experiments that can be done. But the behavior of the students, also, has not been so exemplary. They have been used by the political parties to present demands to other political parties.

DUNHAM: Do you think the youth recognize that they are being used?

RANA: (Shaking head) They will recognize it only when they are forty, I think. At this moment they are enjoying their role on the streets, you see.

DUNHAM: OK, so getting back to the economics of Nepal. Can we talk a little about the water issue? How important is it? Second only to Brazil, Nepal has the biggest potential for hydropower. And I would think that India wouldn’t mind having some of that hydroelectricity. I understand that China has also talked about related projects. And yet there’s practically no drinking water. How important do you see the issue of water?

RANA: It’s getting more and more important-- and getting more and more hopeless. We have the glaciers; we have the rivers flowing in. The right use of the water should have been to have created small irrigation projects, and use them for safe drinking water for the hill people, and irrigation for agriculture and [unintelligible]. But here, dam projects became very popular. Because there is money in that.

DUNHAM: Are you talking about corruption?

RANA: A Nepalese party built one hotel with the commission money from one project. It’s like that. So there’s money in it, there’s beef in it, there’s fat on it, you see, for the dam projects. The point is that, when you generate hydropower, the stakes pay a heavy price; the cost of generation becomes high, so we, the Nepalese consumers, are paying one of the highest unit tariffs for it. So this potential, next to Brazil, is just going to be in the books. I was on the Nepali Electricity Board for five years. And there, whatever we proposed, the bureaucrats were only interested in big dam projects. Why? Because as soon as there is a big dam project, everybody has fees to gain. This is the situation. So if it continues like this, all the potential remains a pipedream. But currently, the government has invited tenders for two or three big dam projects from Indian parties. This is a good beginning.

DUNHAM: I’ve heard a certain amount of cynicism when people discuss the Indians and their dam projects, because of earlier projects in which the Nepalese people had been more or less robbed and hoodwinked into thinking that the deal was going to be a better deal for them when, in fact, it was better for the Indians. Is that aspect still alive?

RANA: Yes, people speak of the previous projects and of the lopsided gains for the Indians. I think it happened because our people didn’t have enough experience and tactical knowledge to deal with the Indians. You see, I was in the government when the Kosi project was discussed. The Prime Minister who signed the treaty was criticized. But I remember when the Indian delegation came, the Nepalese Prime Minister set up a committee comprised of all the senior engineers: They examined the proposal, and they said it was OK. What can be done? For the last ten years or so—I mean, after the political change in Nepal—I was asked for advice and so I’ve been saying that we Nepalese must insist on not getting robbed right from the beginning. Once the Indians have prepared a project design, it will be too much to expect that they will design that project not to their interests. Why should they design to Nepal’s interest? So we must be there right from the beginning to say, “Hey, now if you design like this, half the benefit will go to you and half the benefit will go to us.” Once they have designed the project, they freeze on that and they will not change. It’s a big country.

DUNHAM: The interests are there from the beginning? Nepal now has the engineering expertise to understand Indian plans?

RANA: We Nepalese are very well educated, well trained. We can have discussions with our Indian counterparts on good terms.

DUNHAM: Let’s turn to the future. What will happen if the Nepalese government fails to establish a stable political environment within the next year or so?

RANA: It will be a disaster. Because manufacturing industries—most of them are closing down.

DUNHAM: Because?

RANA: --of the labor problem. So this basic question: Some of the industries are doing well, like the noodles—they are doing well. Iron-steel is doing very well. Cement is doing well. So there are prospects. But I, myself, feel that we should go more for service industries. For large-scale manufacturing, you need to be able to compete with foreign countries. Carpets: Some good carpet companies are doing well even now. But if the dictatorial Maoist trade unions become the order of the day, industry will close down. Then I think we will be at the brink of being a failed state because there will be a political settlement—then we will be a one-party dictatorship of the Maoists—that may be the political order—but then one does not live by politics alone. The country does not survive by politics alone. As a matter of fact, in one of the big political get-togethers I said, “Since 1996, we Nepalese have been preoccupied by politics, politics and politics only! We have never given attention to economics.” Economic systems are by the sideline. Even now, what is happening is the question of one-upmanship politics: Maoists wanting to establish their agenda, UML wanting to be more popular and trying to come up with something new—it’s all politics, not economics.

DUNHAM: There are no economic gurus who can get in there and have a voice?

RANA: (shaking head) Two distinct viewpoints are there: One is traditional, classical left wing viewpoint of nationalizing things—the left wing approach. We have had experience with that. That means licenses and permits for us, which was the order of the day in Nepal until 1998. The other viewpoint is having a free economy: We have had progress from that. But if the leftists dominate the government…

DUNHAM: What about the tourist industry?

RANA: That’s a good prospect. Tourism and banking in Nepal have developed very well because—tourism for the last 20, 30 years, there are good hotels, good restaurants. The Nepalese human resources are experienced. You don’t have to import a chef from anywhere. Nepalese chefs can prepare French food, can produce Japanese, Chinese; reception staff, housekeeping; travel agencies, who promote—all of ths is a good infrastructure. That, I think, will be one area, from which we can pick some hope.

DUNHAM: Is it affected by political turmoil?

RANA: If there’s bandhs and also, if the hotels are being terrorized by the Maoists.

DUNHAM: How are the Maoists doing that?

RANA: The Maoists ask themselves: Who are our voters? And the answer is: Labor. So they go to industries, to hotels and forcibly establish a Maoist trade union. In most manufacturing industries or hotels, there are always two trade unions: One is linked to the Nepali Congress and one leading to UML. Now a third trade union has been established almost everywhere. It’s the Maoist trade union. And they press for higher demands on the management. And because they intimidate, they are successful to some extent. The question is: How long can you keep from killing the goose laying the golden egg? At some point, the Maoists have to realize that there is a line that cannot be crossed. I have met Prachanda; I have met Bhattarai, because I am known as a liberal, so when I asked to meet them, they met me immediately. Baburam [Bhattarai]: whether it has sunk into his head or not – but he articulated the classical communist line. But I said to him, “Yes, there must be areas where the labor laws should be revised. Labor relations need to by systemized. Go for that. Go for that!” The problem with the communists is that they feel that industry and hotels really belong to them! It’s their doctrine. I studied Karl Marx for my masters—the textbooks. I mean, their thinking is different. It’s not a partnership. It’s they who own the land. It’s they who own everything. So how to disabuse them?

DUNHAM: What happens if the people do get a chance to vote and the vote does not favor the Maoists? In your heart, do you believe the Maoists will accept that?

RANA: I have my doubts. But we have to wait and see.

DUNHAM: And if they don’t?

RANA: If they don’t accept, what will they do? Will they resort to what the communists did in Russia? By force, eliminate the opposition? Which means that the army has to be kept in good morale. It should be the people’s army, of course, but acting on the orders of the Government. Up until now, the only reason there hasn’t been a Maoist takeover is the presence of the Nepalese army. And I have told the army people, “You have one blot. You sided with King Gyanendra in staging the coup.